High fuel cost, weak rupee hurting aviation sector’s profitabilityhttps://indianexpress.com/article/business/aviation/high-fuel-cost-weak-rupee-hurting-aviation-sectors-profitability-5324908/

High fuel cost, weak rupee hurting aviation sector’s profitability

The rapid growth in India’s aviation market, which was clocked at 18-20 per cent over the last two years, has also seen the profitability of the country’s airlines being hit.

High fuel cost, weak rupee hurting aviation sector’s profitability
Over the last two years, airlines have seen their costs rise in line with the addition in capacity. (File Photo)

The rapid growth in India’s aviation market, which was clocked at 18-20 per cent over the last two years, has also seen the profitability of the country’s airlines being hit due to rising oil prices and a weakening rupee combined with the airlines’ inability to raise air fares in line with rising costs. In the past year, the price of brent crude has risen around 40 per cent over the last one year while the rupee has depreciated nearly 8 per cent. Consequently jet fuel prices have also risen.

As per data provided by International Air Transport Association (IATA), India was among the countries that saw the most increase in jet fuel prices. Here, it grew by 12 per cent during the last eight months. Notably, fuel accounts for nearly half of an airline’s total costs.

India’s largest airline InterGlobe Aviation Ltd (IndiGo) reported a 42 per cent decline in earnings before interest, taxes, depreciation, amortisation and aircraft and engine rentals (EBITDAR) during April-June. Jet Airways, which commands the second-largest domestic market share, postponed the announcement of its results for first quarter of 2018-19 after reporting an EBITDA loss in last quarter of the previous financial year. SpiceJet reported its earnings for the June-quarter recording a net loss of Rs 38 crore, after 13 consecutive quarters of profitability. For the same period last year, SpiceJet recorded a net profit of Rs 175.2 crore.

Over the last two years, airlines have seen their costs rise in line with the addition in capacity. While IndiGo’s available seat kilometers (ASK) has grown 48 per cent to 63.5 billion in 2017-18, compared with 42.8 billion in 2015-16, SpiceJet’s has grown 51 per cent during the same period to 19.5 billion and Jet Airways’ has grown 16 per cent to 58.2 billion. These three airlines alone are further expected to add more than 700 aircraft to their fleet over the next seven to eight years.

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In the shorter term, the addition of capacity to existing fleets is expected to create a cash-flow problem for the airlines. “Airlines are likely to finance these aircraft deliveries through sales-and-leaseback arrangements, and this reduces the need to drastically improve their cash-flow generation,” Fitch Ratings said in a research note.

Due to the rising fuel costs, airlines have witnessed their cost per available seat kilometer (CASK) also rise, hitting their margins. IndiGo’s CASK grew to Rs 3.15 during 2017-18 from Rs 3.04 in 2016-17. Jet’s rose to Rs 4.39 from Rs 4.33 during the same period, while SpiceJet’s rose to Rs 3.78 from Rs 3.55. The ratings agency noted that that given the projected capacity growth, margins are unlikely to rebound in the short term. However, Amber Dubey, partner and head-aerospace and defence at KPMG, said that capacity additions come after a detailed assessment not just by the airlines but also its lenders, lessors and aircraft companies.”None of these would like a capacity glut and airline distress. Capacity addition in India is in line with the growth projections,” he said, adding that there may also be alliances or consolidation among Indian carriers.

Notably, experts also see airlines that replace their existing fleet with new aircraft that are more fuel efficient to be able to sustain their margins. “Indigo benefits from a young fleet with average age of around 6 years, efficient operations and high aircraft utilisation rates. Unlisted Air India, which has the third-highest share in the domestic market, has been struggling with high debt levels and inefficient operations for several years,” Fitch noted.

The growing costs on account of fuel prices and capacity addition notwithstanding, airlines have been unable to command the fares that sustains profitability even when the oil price is at the crest of its cycle. The recently published air traffic data by the Directorate General of Civil Aviation pointed this out. As per DGCA data, domestic air passenger traffic in July grew by about 21.79 per cent compared with the corresponding period last year. There has also been a month-on-month growth of 20.82 per cent. “While the cost of Aviation Turbine Fuel (ATF) has been increasing, we have witnessed an increase in demand due to discounts offered by airlines. In July 2018, ixigo witnessed an overall growth of 3x in flight bookings as compared to the same period last year,” said Aloke Bajpai, CEO & co-founder of online travel agency ixigo.

Globally, too, airline profitability has been impacted. According to IATA data, operating margins of 42 sample airlines across the world have fallen by more than 200 basis points year-on-year during the June-quarter to 9.2 per cent, while the net post-tax profit fell to $5.64 billion during the period from $7.46 billion a year ago.

In India, owing to the slot constraints at large airports like Delhi and Mumbai, airlines are forced to deploy their capacity at smaller airports, where first-time flyers are significantly contributing to the growth in the Indian market.

“These are extremely price sensitive passengers and a small increase in fee can push them away. The airfares today are not reflective of the cost. It is an investment in expanding the flyer base, very similar to what e-commerce or online cab companies are doing in their sectors. Once the base grows to a significant number, price corrections are bound to happen,” Dubey pointed out.